8 things you should know about Saudi Arabia’s blockbuster bond deal

Photo: A Saudi money changer displays Saudi Riyal banknotes at a currency exchange shop in Riyadh, Saudi Arabia September 29, 2016. REUTERS/Faisal Al Nasser

On October 21st, the oil-rich kingdom made the biggest emerging-markets bond deal in history. And there’s been only one trigger for this move—falling oil prices.

The largest economy in the Middle East is heavily dependent on oil-export dollars, and the plunge in prices from more than $100 a barrel in 2014 to as low as $30 at the beginning of 2016 has caused serious damage to its economy.

Here’s what you should know about the bond sale:

• Saudi Arabia raised $17.5 billion through its offer of $5.5 billion in 5-year, $5.5 billion in 10-year, and $6.5 billion in 30-year notes.

• The massive bond sale is expected to give a flying start to Saudi Arabia’s ambitious plan to move away from oil dependence and head towards a more diversified economy.

• The issue has greatly eased investors’ doubts about the Kingdom’s ability to cope with cheap oil. Saudi bank shares jumped on October 22nd, and the cost of insuring the country’s debt against default fell to its lowest this year.

• One of the most interesting aspects of the bond sale was that it sold more 30-year debt than the rest, which means that $6.5 billion was sold to investors, who will get their money back only in 2046.

• This is just the beginning: the country expects to issue as much as $120 billion in debt in the coming years.

• Though there is little clarity about the use of bond proceeds, bankers expect some part of the $17.5 billion to be deposited with domestic banks, thus increasing their scope to lend and cap the uptrend in rates.

• “One of the main issues facing the banking sector in Saudi [Arabia] is the tight liquidity in the system and the high loan-to-deposit ratio; this issuance should directly help relieve some of this liquidity pressure,” said Mohamed Eljamal, Director of Capital Markets at Abu Dhabi’s Waha Capital, according to Reuters.

• The bond issue is likely to cover Saudi Arabia’s current account deficit—projected at $17.7 billion by the IMF—next year, creating a new source of dollar inflow.

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